Corporation tax and investment

The issue of Ireland's much loved 12.5% corporation tax rate is being widely discussed. Some see the proposal to increase it as "suicidal", others see it as a threat to our sovereignity while the Irish Times' drama critic no less considers it all a distraction. The views of its GAA correspondent are currently unknown.
For those who actually spend any amount of time studying the topic, it is clear that investment decisions are a function of many factors and the effect of taxation is quite complicated, see for example Devereux and Griffith. A recent meta-analysis of 25 studies finds quite large effects viz. "The median value of the tax rate elasticity in the literature is around –3.3 (i.e. a 1%-point reduction in the host-country tax rate raises foreign direct investment in that country by 3.3%)."

The Economics of Tobacco: The Market for Cigarettes in Ireland

A recent report from the Revenue Commissioners Research and Analytics Branch examines "The Economics of Tobacco: Modelling the Market for Cigarettes in Ireland" (Padraic Reidy and Keith Walsh; February 2011). Highlights from the executive summary are below.

"Numerous explanatory variables of cigarette consumption are explored but the only factors that are found to be statistically significant in the most efficient econometric regression are: price, income, the introduction of the smoking ban, EU enlargement and the point of sale advertising ban. Of these, the most important effect is from price.

The model suggests a price elasticity of -3.6, i.e., a 1 per cent increase in price results in a 3.6 per cent reduction in cigarette consumption. This price elasticity is extremely high compared to other estimates for the Irish market, most suggest a figure of between 0.5 and 1. A price elasticity of -3.6 is too high to be realistic, for example it would imply that a 10 per cent increase in price reduces smoking by 36 per cent... Therefore another factor must be at play.

...The price elasticity estimated refers to taxed cigarettes: a 1 per cent increase in price leads to a 3.6 decrease in consumption of taxed cigarettes. The most reasonable theory to explain such a large decrease in taxed consumption is that only part of the reduction is caused by lower smoking levels, the remainder must be caused by smokers switching to substitute cigarettes. The most likely substitutes in the case of taxed cigarettes are non-Irish taxed cigarettes...

...Revenue estimates that currently around 20 per cent of cigarettes consumed in Ireland are not Irish taxed and this figure has been increasing in recent years... Further analysis finds some evidence that cigarette tax levels have moved beyond a critical point at which increases in tax rates lead to lower, rather than higher, tax revenue. Further tax (price) rises will reduce smoking somewhat but they will also greatly encourage more untaxed consumption.

Increasing the taxation of cigarettes in Ireland no longer carries the combined benefits of better public health and higher revenue for the public finances... This suggests that taxation increases are no longer the optimum tool for reducing smoking in Ireland. This is further supported by the significance in the model results of the effect of the smoking ban. Such non-price measures are shown to reduce taxed consumption and do not carry the same incentive to switch to untaxed cigarettes as higher rates of taxation."

Republic of Telly: Should we Tax Confirmation Money?

Republic of Telly ask the really hardhitting questions:

Optimal tax theory & Wayne Rooney

This paper in a leading theoretical public finance journal argues cogently that "superstars" like Wayne Rooney earn rents which can and should be taxed away by the Chancellor of the Exchequer, m'lud. An interesting proposition indeed, although whether this has any implications for tax policy in Ireland where, happily, there are not many superstars is doubtful.

Is Ireland Inc. more than a tax haven?

Nobody will doubt the importance of multi-nationals to this country but the question of corporate taxation shouldn't be so sacred. I think it may well be positive to discuss this and consider our options and their implications.

Ireland's friendly enterprise environment drew massive foreign corporate investment here. Our english-speaking European isle with it's young under-employed workforce was an attractive product, and, in case the raw charm of our officials wasn't enough, the government threw in generous state aid and zero-to-low corporation tax. It worked - they're here and we would like them to stay, and invest more. But do we still need to smear ourselves in honey?

Unfortunately, the government seem to be fumbling this one. Ireland really needs to reassess its position and ask itself a few important questions. We're clearly not the backwater we were in the 70s but right now we seem to be squarely mired. We cannot afford to loose our paddles but we cannot sit still for much longer either.

Here's some questions the government should consider before the forthcoming budget: what is ireland's comparative advantage? how sensitive are MNC in ireland to marginal tax adjustments? what shape is the laffer curve here? how can the "four-year plan" be used to best order and communicate (frame) a possible tax increase to have least impact? how can ireland hold and attract foreign investment in the advent of a (~temporary) tax increase? how can ireland best harness and leverage the current agglomerative advantages it has built-up?

Since tax harmonization is an ultimate part of the European project - Ireland should really stop fooling itself about being able to hold Europe back on this issue. Consider our No votes to treaties in the past, at a time when we were must less obviously dependent on the Union. The country should prepare for the inevitable and start planning to compete on a level international playing field.

Links of Interest: 29th September

1. President Barack Obama chose Austan Goolsbee to succeed Christina Romer as the head of the U.S. Council of Economic Advisers. Here, the Wall Street Journal do a profile of Goolsbee.

2. The Guardian: a "nudge unit" set up by David Cameron in the Cabinet Office is working on how to use behavioural economics and market signals to persuade citizens to behave in a more socially integrated way.

3. The Daily Telegraph on Rory Sutherland's quiet behavioural economics revolution in the advertising industry.

4. Greatest Good: "a unique firm formed with the goal of applying rigorous, cutting-edge data analysis and economic methods to the most salient problems of business and philanthropy." Founding partners include Steven Levitt, Gary Becker, Daniel Kahneman and John List. Affiliates include David Laibson, Emily Oster, Steven Pinker and Richard Thaler.

5. The U.S. National Commission on Fiscal Responsibility and Reform. They have a separate mandate to the Congressional Budget Office. "The Commission is charged with identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run."

6. A fascinating read for any Ph.D. student in Economics, or Ph.D. economist: 'Market Structure in the Production of Economics Ph.D.s'. Frank A. Scott, Jr. and Jeffrey D. Anstine; Southern Economic Journal Vol. 64, No. 1 (Jul., 1997), pp. 307-320.

7. The (Irish) Department of Education and Skills Inventory of Data Sources: "This document contains a matrix of educational data sources which are available from the Department of Education and Science and the agencies under its aegis."

8. University Attendance Scanners: "Northern Arizona University has installed electronic devices that record student attendance in an effort to boost freshmen grades and lift lagging graduation rates. But some students say the monitoring makes them feel less independent." (Southern California Public Radio).

9. "The Production and Deployment of an On-line Video Learning Bank in a Skills Training Environment" - Gerald Cannon, Mary Kelly, Colette Lyng, Mary McGrath; AISHE-J: The All Ireland Journal of Teaching and Learning in Higher Education, Vol 1, No 1 (2009).

10. For economics undergraduates: the Irish Taxation Institute Fantasy Budget Competition. Who needs fantasy football?